The automatic exemption of churches from taxation is a fundamental right under our national constitution. And while most other forms of charities are required to file IRS form 990 or 990-EZ, churches are exempted even from this requirement. The First Amendment’s granting of freedom of religion has led both the courts and the Internal Revenue Service to have accordingly adopted a “hands off” approach to church taxation.
One common aspect of church life is the creation of new works. Ministers write sermons to deliver at worship services. Choral and worship directors and employees compose musical pieces and arrangements for performance at services. Sunday school plans and lessons are composed. Audio-visual projects are created. Art is crafted. Books are written. These things are usually considered intellectual property by the law.
The question becomes: who owns all of this output?
The First Amendment to the US Constitution guarantees religious freedom to churches. From colonial times and since the creation of the very first tax code, churches have always been exempt from federal income taxes. This is part of the guarantee of religious freedom. After all, what the government can tax, it can control and even ultimately destroy. That’s why the federal Tax Code contains an automatic exemption for churches as public charities. Churches also enjoy numerous other favorable benefits such as special rules in place to limit audits, and even state and local tax exemptions.
When a church receives a financial benefit in the form of business income, a number of perhaps unexpected challenges can crop up—particularly with regard to taxes. According to the IRS, income that issues from a source that is not considered to match the purpose of a church is classified differently than exempt income pulled in by church-purpose activities. Such Unrelated Business Income—which may come from coffeehouse proceeds, from the renting of church property, or from other such forms of activity—can be taxed despite an organization’s tax-exempt status, particularly when it exceeds $1000. In this case, the organization is required to file a Form 990-T, and must also pay estimated tax when the tax amount for the year is expected to break the $500 limit.